Internal Analysis and SWOT Analysis

In the pass, the Kraft Corporation has established its product portfolio through internal innovation and acquisition. Today, Kraft is the largest producer of consumer food products. Kraft’s portfolio contains a host of well established brands – Oreo, Nabisco, Kool-Aid, Maxwell House, Oscar Mayer, Velveeta, and numerous others. The industry to which Kraft belongs is defined as large producers of food and beverage products. Companies in this industry generally operate domestically as well as internationally, in both developed and undeveloped markets. The industry is characterized by intense competition on both price and quality, with advertising and marketing playing a huge role in building consumer demand and generating brand loyalty. Throughout its history, the Kraft Corporation has established its product portfolio through internal innovation and acquisition.

Today, Kraft is the largest producer of consumer food products. Kraft’s portfolio contains a host of well established brands – Oreo, Nabisco, Kool-Aid, Maxwell House, Oscar Mayer, Velveeta, and numerous others. The industry to which Kraft belongs is defined as large producers of food and beverage products. Companies in this industry generally operate domestically as well as internationally, in both developed and undeveloped markets. The industry is characterized by intense competition on both price and quality, with advertising and marketing playing a huge role in building consumer demand and generating brand loyalty. (Kraft Food, 2012)

My strategic analysis of this company shows impending threats that can damage the company’s margin of profit and global stake in the fast-moving food industry. Local brands, multinational competition, and an increase in energy cost, transportation, taxation and regulations are mounting obstacles to Kraft’s continued success. In order to overcome these and other future vulnerabilities, the company needs to continue its product and research development (R&D), introspection, new market campaigns, and monthly internal & external monitoring. By monitoring performance monthly, it is possible to alert cost centre managers to variances so that they can take appropriate corrective action or justify the new level of spend. At all stages the Senior Management team of Kraft is fully aware of any material variances that are derived from comparing actual spend vs. budgeted figures.

Despite the bad economic conditions of the world around, Kraft foods is making good earnings from its market involvements via its products and brands. The company is delivering high quality earnings to its shareholders despite the difficult economic environment. They are continuously investing in their brands and businesses to further provide excellent product offerings to their customers. As a result of their investment strategies, the Kraft Foods is very well positioned to deliver sustainable top-tier performance, with or without Cadbury (Kraft foods financial news, 2011). In 2008, Kraft Foods was once again named to the Dow Jones Sustainability World Index and the Dow Jones Sustainability North America Index in recognition of the company’s economic, environmental and social performance (KFSPFS, 2009).

Kraft Foods has set an example in the global industry by determining a push to reduce the impact of its operations on the environment in the US and around the world. The company released its CSR report in 2010 which stated its environmental goals agenda to reduce the effects of energy and the carbon dioxide emissions in food plants to the conservation of water and minimizing excess packaging. They are creating packaging that uses less material, weighs less and reduces impact on landfills – without compromising food safety or freshness. As part of their plan to reduce our “carbon footprint,” Kraft foods are improving their energy efficiencies, using less energy and finding new and cleaner sources of energy. Kraft Foods look for opportunities to reduce the use of water to minimize the impact of water discharge and even reuse water in ways.

The company has long way to go. It can utilize number of options available currently to get rid of debt requirements and other frills that are causing low market share to the company. Firstly, Kraft Foods can engage itself in the market expansion process. This can be achieved in the developing markets of Asia like India, China, and Japan etc. these markets show great potential for the business. Although Kraft Foods have acquired Cadbury but lots of its resources of revenue are still untapped to the company. Cadbury is a major player in the developing countries and earns billions of revenues from its customers in India, China and other Asian countries.

Kraft foods can use Cadbury’s brand equity to offer new products in these markets to explore these markets and opportunities present there further. Secondly, Kraft Foods can reposition itself in the existing markets with more unique and health centered products. There is an increasing trend among the customers that they like to buy fresh, original and organic products. The company can reposition itself in the market as a provider of farm fresh products to gain the customer attention.

Kraft Foods is weak on its overseas market performance. The company acquired Cadbury which no doubt increased its profit ratio to many folds but it also added lot of debt pressure on the company. Along with the debt requirements the company faces cut throat competition with Nestle and Hershey’s in the markets. Despite of its operations in various markets and presence in U.S and other markets, the company is weak on geographic concentration. Kraft foods has low market share but it enjoys high margins in grocery business. Kraft has about 9% market share in the $40 billion global grocery market. Although the grocery division’s contribution to Kraft’s revenues is lower compared to other divisions, it has EBITDA margins of 33% which are higher than the 14-15% margins in Kraft’s other businesses. The high profit margins make grocery a lucrative business line for Kraft (Trevis, 2011).

The Branded Foods and Beverages Industry are characterized by intense competition and a constant quest for preserving and increasing market share. The main vehicle by which firms in the industry preserve market share is through brand loyalty and diversification. In general, the products of these firms are highly elastic with consumers weighing the trade off between price and quality between companies and products. Consumers in the industry have minimal switching costs and there is never the guarantee of brand loyalty. Therefore, the way these firms maintain market share is by providing brand quality at an affordable price. Indeed, the main issue currently faced by Kraft Foods Inc. is the Cadbury purchase related issues. After the purchase of Cadbury, there was lot of protest among the British nationals against this acquisition. The profit margins of the company dropped subsequently during this. The customers stopped purchasing the products offered by Kraft Foods, thus, hurting the market position of the company badly.

The acquisition brought no changes to the company as they failed to properly utilize the resources of Cadbury and failed to implement the proper positioning structure in the markets. There are chances that this acquisition can lead to the customer walk outs from Kraft products as a reaction to the purchase of Cadbury. This does not end here, the company faces fierce competition with Nestle and Hershey, the two giants.

Indeed, Kraft’s financial struggles begin at the top line and flow through the rest of the financial statements. One of the overriding problems facing Kraft is the company’s inability to increase revenues. Recently, Kraft has increased prices on several products as input costs have risen. In an already saturated industry defined by competition, these price increases ultimately affect volume sales. Over the past three years, top line growth has begun to taper-off. Financial analysts project about 2-3% revenue growth over the next year as volumes increase slightly. Growth is expected to slow because of price increases and the loss of volume from divested products.

Stagnant growth in the United States is also a result of declining at-home consumption of food products, the rise of private label products, and changing consumer preferences regarding health. If we break down revenue by segment, then we see that low total revenue growth is being driven by U.S. segments. Developing and emerging markets, where diets are beginning to move beyond mere sustenance, appear to be one of the most promising areas of growth. Kraft might also seek to increase revenues through acquisition.

My conclusion, There are two main strategic issues facing Kraft. The first strategic issue is the reduced use of financial derivatives to control for rising commodity and input costs. Financial derivatives, because they must be purchased prior to precise knowledge of a future payout, are an expense with no guaranteed benefit. In recent periods, financial derivatives have adversely affected the performance of many companies in the industry. These companies, basing current decisions on past trends, are using financial instruments less and less to control for rising input costs with the fear that they will only create a drag on the bottom line.

This is a major problem in the current environment of rising input costs. Rising input and commodity costs are creating the most pressure on Kraft’s margins, as discussed in the financial analysis section of this report. If Kraft continues its moderate use of futures and forwards to hedge against commodity prices, then the Company’s profits are vulnerable to spiraling input costs. To solve this problem, Pandora Group urges Kraft to reassess their risk management strategy, and more specifically, to use financial derivatives more aggressively to control commodities costs and preserve margins.

My opinion, the second strategic issue facing Kraft is the negative effect on Kraft’s debt ratings and stock performance as a result of the Company’s link with parent company Altria (Phillip Morris). Kraft’s debt ratings and stock price have been more negatively affected by speculation and concerns over pending tobacco litigation facing Altria than by any material changes in Kraft’s operations. The solution to this problem, therefore, is to separate Kraft from parent Altria and make Kraft an entirely separate entity. The spin off of Kraft will result in a more favorable valuation, an increase in the Company’s debt ratings, and will provide Kraft the opportunity to capitalize on current trends in the capital markets.

REFERENCES
2012 Form 10-K, Kraft Foods Inc. United States Securities and Exchange Commission, Retrieved on June 21, 2011 from http://www.sec.gov/Archives/edgar/data/1103982/000119312511048979/d10k.htm Carnegie Research Inc., 2009. Legal and Regulatory Issues, Retrieved on June 21, 2011from KFSPFS, 2009. Kraft Foods Sustainability Progress Fact Sheet, Retrieved on